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Chapter 1 Recording Departmental Purchases and Cash Payments

Dawson_David Wednesday, September 23, 2009 8:22:55 AM ET

 Assets

Anything of value that is owned.

 Examples: Cash, Accounts Receivable, Allowance for Uncollectible Accounts, Supplies, Prepaid Insurance

 An increase in an Asset Account is shown as a Debit balance.


 Liabilities

An amount owed by a business.

 Examples: Accounts Payable, Employee Income Tax Payable, Sales Tax Payable, Any Other Payable

 An increase in a Liabilities Account is shown as a Credit balance.


 Equity

Financial rights to the assets of a business.

 Examples: Capital Stock, Retained Earnings, Dividends, Income Summary

 An increase in an Equity Account is shown as a Credit balance.


 Owner’s Equity

The amount remaining after the value of all liabilities is subtracted from the value of all the assets.

 Accounting Equation

An equation showing the relationship among assets, liabilities and owner’s equity.


Accounting Equation

Assets = Liabilities + Owner’s Equity

  Total assets must equal total liabilities plus owner’s equity.

Accounting Equation

(Left side of equation) (Right side of equation)

Assets = Liabilities + Owner’s Equity


Right side Left side

Assets Liabilities Owners’ Equity = +

CREDIT DEBIT

T Account

(Right side) (Left side)


 Revenue

The the income generated by a product or service over a period of time.

 Examples: Sales, Sales Discounts, Sales Returns and Allowances

 An increase in Revenue Account is shown as a Credit balance.


 Expense

The economic costs that a business incurs through its operations to earn revenue.

 Examples: Advertising Expense, Selling Expense, Operating Expense

 An increase in Expense Account is shown as a Debit balance.


  Accounting records show changes and the current account balance of each asset, liability, and owner’s equity account.

  Source Documents

Information about business transactions obtained from original business papers.

  Each journal entry must be supported by a source document proving that a transaction occurred.


  Double-Entry Accounting

The recording of debit and credit parts of a transaction.

Common Accounting Principles for Double-Entry

1.  The total value of things owned by a business (Assets) equals the total value of claims of outsiders (Liabilities) and claims of owners (Owner’s Equity).

2.  Debits equal credits for each business transaction recorded.


  Journal

A form for recording transactions in chronological order.

Two Types of Journals

1.  General Journal

May be used to record all business transactions.

2.  Special Journal

Used to record only one kind of transaction.


Special Journal

  Purchase Journals – for all purchases on account

  Cash Payment Journals – for all cash payments

  Sales Journal – for all sales of merchandise on account.

  Cash Receipts Journal – for all cash receipts


  Transactions are journalized in chronological order.

  Account

A record summarizing all the information pertaining to a single item in the accounting equation.

  Account Balance

The amount in an account.


  Each business transaction causes a change in two or more account balances.

  Increases in an account balance are recorded in the same column as its normal balance.

  Decreases in an account balance are recorded in the opposite column.

  See next slide for the Normal Balance of Accounts


  Ledger

A group of accounts.

  General Ledger

A ledger that contains all accounts needed to prepare financial statements.

  Subsidiary Ledger

A ledger that is summarized in a single general ledger account.

  Controlling Account

An account in a general ledger that summarizes all accounts in a subsidiary ledger.


Subsidiary Ledgers

  Accounts Receivable Ledger

  Accounts for customers who buy merchandise on account.

  The corresponding controlling account is Accounts Receivable.

  Accounts Payable Ledger

  Vendors to whom money is owned.

  The corresponding controlling account is Accounts Payable.

  The total of the subsidiary ledger accounts balances should equal the balance of the controlling account.


  General ledger account numbering system must meet three needs.

1.  A separate numeric listing is provided for each ledger division.

2.  A predesigned arrangement of numbers is provided within each ledger division.

3.  Enough account number digits are provided to allow the addition of new accounts.


  General ledger chart of accounts has seven divisions.

1105 – Cash

  The 1st digit shows the general ledger division in which the account is located.

  The 2nd digit shows the category in which the account is located .

  The last two digits show the location of a specific account with respect to other accounts in that division and category.


  General ledger accounts use a 4 digit numbering system.

  Initially assigned sequentially by 5’s.

  Businesses add accounts as needed.

  A new account is assigned the unused middle number between the two existing accounts.

  New accounts that are added after the last account in a division are assigned the next number in sequence.


  Subsidiary ledger accounts similar to general ledger accounts except:

  3 digit number system

  Account numbers are assigned in 10’s


On a Separate Sheet of Paper

  p. 11 Audit Your Understanding #’s 1-3

Complete in your Workbook

  p. 11 Work Together #4

  p. 11 On Your Own #5

  P. 29 Application Problem 1-1


LESSON 1-2 Journalizing and Posting Purchases and Purchases Returns


  Departmental Accounting System

An accounting system showing accounting information for two or more departments.

  The general ledger must include a number of separate departmental accounts.


  Merchandising Business

A business that purchases and sells goods.

  Merchandising Businesses may have two types of equipment: 1.  Equipment purchased for sale to customers.

2.  Equipment used in the operation of the business.


  MasterSport uses a departmental accounting system.

  Accounting information is recorded and reported for two departments: 1) Golf and 2) Tennis.

  Golf accounts are indicated with a -1 after the account number. (Ex: 1125-1 Merchandise Inventory - Golf)

  Tennis accounts are indicated with a -2 after the account number. (Ex: 1125-2 Merchandise Inventory - Tennis)


  Purchase invoices are used as the source document for all purchases on account.

  All departmental purchases of merchandise on account are recorded in a purchase journal.


Steps to Journalize a Purchase on Account

1.  Write the date in the Date column.

2.  Enter the vendor name in the Account Credited column.

3.  Record the invoice number in the Purch. No. column.

4.  Write the credit amount in the accounts Payable Credit column.

5.  Record the debit amount in the Purchases Debit Tennis column.


LESSON1‐2

June 1. Purchased video equipment on account from Western Digital Systems, $845.00. Purchase Invoice No. 336.

1. Write approval date.

4. Write invoice amount. 3. Record invoice number. 2. Write vendor name.


  Posting

Transferring information from a journal entry to a ledger account.

  MasterSport keeps vendor accounts in an accounts payable ledger.

  The transaction recorded in the Purchase Journal must be posted to the Accounts Payable Ledger.


Steps to Post from the Purchases Journal to the Accounts Payable Ledger

1.  Write the date of the transaction in the Date column.

2.  Enter the Purchase Journal page number in the Post.Ref. column.

3.  Record the credit amount in the Credit column.

4.  Add the amount in the Credit column to the previous balance in the Credit Balance column.

5.  Record the vendor number in the Post. Ref. column of the journal.


35LESSON1‐2

1. Write the date. 5. Write vendor number. 4. Calculate new account balance.

3. Record the credit amount. 2. Write journal page number.


  Example 2

  March 8: Purchase computer equipment on account from Computer World, $1,245.00 for the Golf department.

  Purchase Invoice No.453.

  Vendor No. 87


  The Purchase Journal is proved and ruled at the end of each month.

  A Purchase Journal is proved by adding each column and then proving that the sum of the debit column totals equal the credit column total.

  Double line are then ruled across the amount columns to show that the totals have been verified as correct.

  Each amount column total is posted to the general ledger account named in the column heading.


Steps to Post the Total of the Accounts Payable column to the General Ledger

1.  Write the date in the Date column.

2.  Write the Purchases Journal page number in the Post. Ref. column.

3.  Write the column total in the Credit amount column.

4.  Calculate and record the new account balance in the Balance Credit column.

5.  Write the General Ledger account number in parentheses below the column total in the Purchase Journal.


LESSON1‐2

4. Calculate new account balance.

3. Write column total. 2. Write journal page number. 1. Write the date.

5. Write account number.


  Merchandise may be returned to a vendor for several reasons.

  When merchandise is returned, the vendor usually gives the buyer credit.

  Debit Memorandum

A form prepared by the customer showing the price deduction taken by the customer for returns and allowances.

  Debit memorandums serve as a source documents for purchases returns and allowances transactions.


  Contra Account

An account that reduces a related account on a financial statement.

  Purchases –Tennis is a cost account.

  Purchases Returns and Allowances – Tennis is a contra cost account.

  Purchases returns and allowances are kept in a separate account and not deducted directly from the purchases account.

  This procedure helps the business see what proportion of the merchandise was returned.


  MasterSport record all purchases returns and allowances in a purchases return and allowances journal.

  Example #3

  June 3: Return tennis equipment to Key Tennis Company, $54.50 from Purchase Invoice No. 333. Debit Memorandum No. 22


Steps to Journalize a Purchases Return

1.  Write the date in Date column.

2.  Enter the vendor name in the Account Debited column.

3.  Record the debit memorandum number in the Debit Memo. No. column.

4.  Write the debit amount in the Accounts Payable Debit column.

5.  Record the credit amount in the Purchases Returns and Allowances Credit Tennis column.


  Purchases returns and allowances are posted in the same manner as Purchases on Account.

  Each amount written in the Accounts Payable Debit column is posted often to the vendor account written in the Account Debit column.

  The Purchases returns and allowances journal is abbreviated as PR in the Post. Ref. column. (Ex: PR6)

  The debit balance reduces the amount to be paid for future purchases.


  A purchases return or allowance may be made after a vendor has paid in full.

  After the return has been posted, the vendor account my have a debit balance instead of a normal credit balance.

  The debit balance reduces the amount to be paid for future purchases.

  Contra Balance

An account balance that is opposite the normal balance .

  A contra balance is shown by enclosing the amount in parentheses in the account’s Balance column.


  A purchases returns and allowances journal is proved, ruled, and posted at the end of each month.

  Each column total is posted to the general ledger account named in the column heading.

  The account number is written below the journal’s column total to show that the amount has been posted.





  p. 19 Work Together #’s 3-4

  p. 19 On Your Own #’s 5-6

  p. 29 Application Problem 1-2


General Ledger Balances

Account Payable Balance: $11,123.00 Credit

Purchases –Cellular Phones Balance: $4,823.00 Debit

Purchases-Pagers Balance: $4,155.00 Debit

Purch. Ret. Allow.-Cellular Phones Balance: $195.00 Credit

Purch. Ret. Allow.-Pagers Balance: $295.00 Credit


LESSON 1-3 Journalizing and Posting Cash Payments and Reconciling the Bank Statement


  Most of MasterSport’s cash payments are made by check.

  Checks are the source document for the cash payments.

  All cash payments are recorded in a cash payments journal.


Cash Payments on Account

  Purchases on account are expected to be paid in a timely manner.

  A seller may encourage early payment by allowing a deduction from the invoice amount.

  Cash Deduction

A deduction that a vendor allows on the invoice amount to encourage prompt payment.



  Purchases Discount

A cash discount on purchases taken by a customer.

  A purchase discount is usually stated as a percentage.

Examples

  2/10 = 2% of the invoice amount may be deducted from the amount due if payment made within 10 days of the invoice date.

  n/30 = payment of the total invoice amount must be made within 30 days of the invoice date.



  A purchase discount reduces the net amount of cash paid for a purchase.

  Purchases Discount-Tennis is an account in the MasterSport’s general ledger.

  Purchases discounts are kept in a separate accounts and not deducted directly from the purchases accounts.



  Contra Account

An account that reduces a related account on a financial statement.

  The purchases discount accounts are contra accounts.


June 1. Paid cash on account to AudioMax, $514.50, covering Purchase Invoice No. 331 for surround sound audio equipment for $525.00, less 2% discount, $10.50. Check No. 315.

1. Write the date. 4. Write the debit amount.

3. Record the check number. 2. Enter vendor name.

6. Enter the credit amount. 5. Record the discount amount.

page 19


  An additional calculation is necessary when a discount is taken after a purchase return or allowance has been granted.

  The discount is calculated on the amount owed at the time of the invoice is paid.

  The amount of the of the return or allowance must be deducted from the amount of the original purchases before the discount can be calculated.


June 2. Paid cash on account to Western Digital Systems, $781.55, covering Purchase Invoice No. 336 for video equipment for $845.00, less Debit Memorandum No. 22 for $47.50, and less 2% discount, $15.95. Check No. 316.

Amount owed on invoice: Original Purchase Invoice

Amount (P336) Purchase Invoice

Amount After Return Purchases Return

(DM22) – =

$845.00 – 47.50 = $797.50

$797.50 × 2% = $15.95

– $15.95 $781.55 = $797.50

Purchases discount: Purchase Invoice Amount

After Return Purchases Discount

Purchases Discount Rate × =

Amount due after purchases discount: Purchase Invoice Amount

After Return Total

Amount Due Purchases Discount – =

page 20


June 2. Paid cash for administrative supplies, $136.00. Check No. 317.

1. Write the date. 2. Enter the account title. 3. Record the check number. 4. Write the debit amount. 5. Enter the credit amount.


June 2. Paid cash for rent, $1,500.00. Check No. 318.

page 21


  Petty Cash

An amount of cash kept on hand and used for making small payments.

  MasterSport’s petty cash fund is $500.00

  It replenishes petty cash whenever the fund is below $100.00.

  The petty cash account is also replenished on the last business day of each fiscal period to assure that all expenses are recorded during the fiscal period in which they occurred.


  To replenish petty cash, a check is written for the amount spent from the fund.

  The check is cashed and the money placed back in the fund.


June 30. Paid cash to replenish the petty cash fund, $402.00: administrative supplies, $300.00; advertising expense—video, $56.00; miscellaneous expense, $46.00. Check No. 350.

1. Write the date.

3. Record the check number. 2. Enter account titles.

4. Write the debit amounts. 5. Enter the credit amount.


  MasterSport posts often from the General Debit and General Credit columns to the general ledger.

  MasterSport also posts frequently from the Accounts Payable Debit column to the accounts payable ledger.

  At the end of the month, the cash payment journal is proved and ruled.

  Totals of the special amount columns are posted to their respective accounts in the general ledger.


  The general ledger account number is written in parentheses immediately below the total.

  A check mark is recorded in parentheses below the totals of the General Debit and Credit columns to show that these totals are not posted.


  Bank Statement

A report of deposits, withdrawals, and bank balance sent to a depositor by a bank.

  They are sent monthly.

  Canceled checks are listed on the statement.

  A depositor should check the bank statement for accuracy as soon as it is received.


  The bank balance is compared to the checkbook balance.

  Reconciling a Bank Statement

Bringing information on a bank statement and a checkbook in agreement.


Steps to Reconcile a Bank Statement

1.  Enter the checkbook balance as shown on check stub. $33,231.55

2.  Enter and add bank charges to obtain total bank charges. $352.80

3.  Deduct total bank charges from checkbook balance to obtain adjusted checkbook balance.

4.  Enter bank balance as shown on bank statement. $20,525.23


Steps to Reconcile a Bank Statement

5.  Enter and add the amounts of any outstanding deposits recorded on the check stubs but not listed on the bank statement to obtain total outstanding deposits. $12,828.52

6.  Add total outstanding deposits to bank balance. $33,353.75

7.  Deduct total outstanding check. $475.00

8.  Verify that the adjusted checkbook balance and adjusted bank balance are the same $32,878.75


  All bank charges listed on a bank statement are considered cash payments.

  Each bank charge must be recorded in a cash payment journal.


  June 30 Received bank statement showing June bank service charge, $12.80. Memorandum No.18.

  June 30 Recorded credit card fee expense for June, $340.00 Memorandum No. 19.


Steps to Journalize the Cash Payment for a Bank Service Charge

1.  Write the date.

2.  Enter the account title in the Account Title column.

3.  Record the memorandum number in the Ck. No. column and identify by the letter M.

4.  Write the debit amount in the General Debit column.

5.  Record the credit amount in the Cash Credit column. Dawson_David Wednesday, September 23, 2009 8:22:55 AM ET




  p. 27 Work Together #’s 4-5

  p. 27 On Your Own #’s 6-7

  p. 29 Application Problem 1-3, 1-4


General Ledger Balances

Cash Balance: $16,094.00 Debit

Petty Cash Balance: $300.00 Debit

Supplies Balance: $2,695.00 Debit

Account Payable Balance: $1,963.00 Credit

Purch. Discounts-Guitars Balance: $0.00

Purch. Discounts-Keyboards Balance: $76.00 Credit

Advertising Expenses Balance: $22.00 Debit

Credit Card Fee Expense Balance: $278.00 Debit

Misc. Expense Balance: $37.00 Debit Dawson_David Wednesday, September 23, 2009 8:22:55 AM ET

Purchase Journal

Accounts Payable Credit: 4,660.40

Purchase Debit: Cameras: 2,974.40

Accessories: 1,686.00


Purchases Returns and Allowances Journal

Accounts Payable Debit: 295.50

Purchases Returns and Allowances Credit: Cameras: 88.00

Accessories: 207.50


Cash Payment Journal

General Debit: 2,166.80

Accounts Payable Debit: 4,680.00

Purchases Discounts Credit: Cameras: 40.16

Accessories: 22.40

Cash Credit: 6,784.24 Dawson_David Wednesday, September 23, 2009 8:22:55 AM ET

 Audit Your Understanding: p. 11, 19, 27

 Work Together: p. 11, 19, 27 (Workbook)

 On Your Own: p. 11, 19, 27 (Workbook)

 p. 29-30 Application Problems: 1-2, 1-3, 1-4

 p. 31 Mastery Problem: 1-5


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